Canadian economy slows, reinforcing central bank caution

OTTAWA (Reuters) - The Canadian economy unexpectedly shrank in August, reinforcing forecasts from the Bank of Canada about slowing growth and damping down market expectations of a possible third rate hike this year.

Construction workers works on building new homes in Calgary, Alberta, May 31, 2010. REUTERS/Todd Korol

August gross domestic product edged down by 0.1 percent from July, the first month-on-month decline since October 2016, in part due to maintenance shutdowns in the chemical and extractive industries, Statistics Canada (Statscan) said on Tuesday.

Analysts in a Reuters poll had predicted a 0.1 percent increase in GDP after the economy stalled in July.

Producer price data were also weaker than expected and the Canadian dollar quickly dropped to C$1.2914 to the U.S. dollar, or 77.44 U.S. cents, from C$1.2849, or 77.83 U.S. cents before the release.

The Bank of Canada raised rates in July and September but sat on the sidelines last week, lowering its estimate for third-quarter annualized growth to 1.8 percent to 2.0 percent.

Governor Stephen Poloz said more hikes would be required over time while noting the central bank would be cautious as it considered its next move, relying heavily on economic data. The bank’s next rate announcement is in December.

“The moderation of growth and still mild inflation will be welcomed by a Bank of Canada intent on delaying interest rate hikes for as long as possible,” said Patric Booth of National Bank.

The manufacturing sector slipped by 1.0 percent, pulled down by a 7.3 percent slump in chemical manufacturing - the largest monthly drop in 20 years - caused by plant shutdowns and lower demand for export markets.

The mining, quarrying and oil and gas sector edged down by 0.8 percent as maintenance-related closures hit conventional oil output in Newfoundland and Labrador.

Nick Exarhos, economist at CIBC Capital Markets, said the Statscan GDP release “justifies the Bank of Canada’s current wait-and-see approach after two quick hikes”. CIBC thinks the next move will be early next year.

Separately, Statscan said producer prices fell 0.3 percent in September from August as a stronger Canadian dollar cut the cost of motorized and recreational vehicles.

Analysts in a Reuters poll had forecast prices would increase by 0.4 percent from August. Of the 21 major commodity groups, 16 were down, four rose and one remained unchanged.